After health insurers came out swinging earlier this week with a report deeply critical of the health-reform bills making their way through Congress, it was clear that they were no longer even pretending to support such an ambitious overhaul. The question was how strongly Democrats would fire back at their longtime nemeses, and whether the explosive rift would hurt or help the chances of reform becoming a reality. Within hours there were already indications that insurers' attacks could backfire, and on Thursday Speaker of the House Nancy Pelosi left little doubt that Democrats are not only feeling more confident about reform, but are ready to make insurers pay for their sudden shift.

"It is absolutely clear that it is an unsustainable situation as we go forward, and it is well known to the public that the health-insurance companies are the problem," Pelosi told reporters Thursday. "There are some things that we want to see happen to the insurance companies that they may not like." The House, Pelosi said, might adopt a $40 billion fee on insurance companies to help them pay for the health-care-reform bill, as well as a windfall profits tax. Both chambers of Congress, she added, are seriously thinking of including a provision to strip health insurers of their longstanding federal antitrust exemption. And she said a provision in the House bill mandating that insurers spend 85 cents of every dollar they get in premiums on benefits might be too generous and may need to be tightened. (Read "Understanding the Health-Care Debate: Your Indispensable Guide.")

While Pelosi's tone seemed downright hostile, it reflected a common feeling among her colleagues that the insurers had started to play dirty. On Sunday America's Health Insurance Plans (AHIP), an industry lobbying group in Washington, put out a report that claimed that the bill being drafted by the Senate Finance Committee would raise annual premiums by nearly $4,000 for typical American families. It was widely panned as being misleading, but just a few days later Blue Cross Blue Shield released its own study  also challenged as questionable  claiming that premiums could go up as much as 10% next year if the Senate bill became law. At the same time, AHIP launched a $1 million ad campaign against the measure, warning seniors that the bills could mean major cuts to Medicare. Undaunted by the criticism, Blue Cross Blue Shield has said it plans a "wave" of further reports detailing the effects on specific states, and AHIP plans to issue another study as early as Friday.

"Health plans strongly support comprehensive, bipartisan health-care reform that covers everyone and makes health-care coverage more affordable," said AHIP spokesman Robert Zirkelbach. "The American people want policymakers to pursue reforms that are in the best interest of the country, not as retaliation for speaking out about rising health-care costs," he said, referring to Pelosi's remarks. (See 10 players in health-care reform.)

The pitched rhetoric may be new, but the fight has actually been some time in the making. Though Karen Ignagni, AHIP's president, pledged along with other health groups in May to help find $2 trillion in savings as part of their support for reform, AHIP has done little to produce any real savings, according to Senate Finance Committee aides. And when Senate Finance Committee chairman Max Baucus took out his scalpel to try to shrink the bill's long-term cost, the insurers fought almost all of his proposals  from cuts in the Medicare Advantage program to an excise tax on higher-end, so-called Cadillac health-care plans. Insurer Humana even sent out a letter over the summer warning its customers that their services could see dramatic cuts under the bill; a large portion of Humana's customers are on government-subsidized Medicare Advantage plans, which allow seniors to get their government-provided insurance from the private sector.

Meanwhile a House committee began investigating CEO compensation at health-insurance companies, and last week the Senate Finance Committee passed an amendment implementing a tax on health-insurers' executive salaries that would bring in $600 million over 10 years.

The final straw, it seems, was an amendment in the Senate Finance Committee that weakened the individual mandate requiring most Americans to purchase coverage. Insurers argue that in order to defray costs and keep premiums down, younger, healthier people must be brought in to balance an expected influx of previously uncovered, less healthy middle-aged people. Democrats counter that the weakening of penalties for failing to sign up for health insurance were offset by stronger incentives to do so and point to a Congressional Budget Office study that finds the percentage of Americans who would be covered would be about the same as under the stronger mandate.

Not everyone, however, is interested in waging war, and there are already indications that the Democrats' tough talk may be dividing the opposition. Aetna CEO Ron Williams has spent the last week trying to mend the rift between Democrats and insurers, according to a report in the Wall Street Journal. Aetna also recently beefed up its own lobbying shop, as did UnitedHealth Group and Humana. Health insurers may simply be realizing that they have much more to lose than gain in the current tussle; most observers believe they waited too long to tackle reform head-on, and even the insurers themselves have to know they hold precious little credibility with the American public.

Indeed, the insurers seem to have done nothing so much as galvanize the often fractious Democrats. Before this week, a proposed government-funded public plan to compete with private insurers to reduce costs seemed to be off the table. In the Senate it most likely still is; but in the House, Pelosi is using the industry's assault to coax recalcitrant moderates to sign on to a strong public option. "Anyone who had any doubts about the need for such an option need only look at the behavior of the health-insurance industry this week," she said. "The idea that we would have health-insurance reform without a public option becomes less likely."